An Archaic Revenue Model

July 16, 2009 § Leave a comment

Archaic, kind of like ad-based revenue models.

Archaic, kind of like ad-based revenue models.

Handed down from generation to generation, revenue based on advertising has been around since the dawn of the newspaper (possibly even before? I don’t know my advertising history). Unfortunately, little has changed in terms of media revenue models. Sure, there’s subscription based revenue models, but that’s hardly viable in the age of free, instant information (take note, New York Times). One would think VC’s would be more cautious investing in companies based on a primarily advertising-based revenue model especially since it’s not a recession-proof revenue model. It’s okay if that’s one component of a company’s revenue model, but not the only component.

However, while there is a façade of cautious investing, investors have on rose colored glasses when it comes to internet companies with popular appeal, but zero ability to be cash positive or zero ability to create a sound revenue model. This is especially true when it comes to Facebook–a startup created by a Harvard dropout which incidentally has become one of the most visited sites on the web. Whether or not Facebook’s value is inflated is an argument that could be made into a thesis–arguments going in either direction. However, the fact remains that Facebook has valuable market data on its users, yet, has been unable to effectively utilize it. What is the point of sitting on top of valuable market data if it doesn’t profit from it? On the other hand, should their revenue model consist partly of selling private user information to a third party, or giving third parties access to personal user data, this could undermine user’s trust in Facebook and result in a decline of users sharing their personal information with the social networking site, which would consequently deflate Facebook’s value.

Not only has Facebook burned through their revenue, but they’ve burned through their VC funding. Although Facebook is looking to create more personalized targeted advertisements (a venture which, if successful, would prove Facebook critics wrong, and could potentially be a threat to Google), it has yet to capitalize on the personal information its users entrust in the site. In fact, it’s current method of targeted advertising is fairly unsophisticated. I often receive targeted advertising in Swedish, or it’s based off of the information I put in the “Personal Information” part of my profile. For some reason I also receive a lot of shopping related advertisements. I have no idea why as I hate shopping. Overall, Facebook is a social networking site surrounded by hype, but lacking in substance. And by substance, I mean, benefiting from its vast database of personal user information.

Which brings me to my next point, although Facebook is lacking in the ability to be cash positive, it’s not nearly as hype-inflated as startups based on Facebook applications. For starters, why base the foundation of your startup on another statup (which, to reiterate, has yet to create a sound revenue model). An advertising based revenue model is hardly sound, especially considering that model is a copy of the model used by traditional media (and look at the state of traditional media now). A startup based on creating Facebook applications is a lot of hype, with little substance. Sure, they have access to select personal user information, which allows them to use this information as a marketing tool–possibly even utilizing this information to sell to third parties, but as far as monetizing on the product and service they’ve created, most Facebook applications have hardly been able to add any tangible value. Should Facebook start some sort of monetization off personal user data, Facebook applications can kiss their chance at monetizing goodbye. Creating a startup based off of Facebook applications is hardly innovative, and surrounded in overrated hype. Creating a viable revenue model that’s not based on advertising, with a foundation not based on another startup, now THAT is innovation.

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